The Best Mortgage IS a Fixed Rate Mortgage

By
Mortgage and Lending with Mortgage Financial Group, Inc

The Best Mortgage IS a Fixed Rate Mortgage

When shopping for a mortgage, one can easily become overwhelmed with all the different mortgage programs that are out there: Fixed Rates (FRM), Adjustable Rates (ARM), Hybrids, etc.

The problem that consumers face is "which mortgage is the best?"  The answer to this is: the best mortgage program is that program that best suits the individual's needs.  But how does one know which is the best, if one is not up on all the different types of mortgages?

         

Well, let's break mortgages down to their very basic levels: rate and term.  Rate is the interest rate that one pays to bank.  Rate is determined by risk.  Term is the length of time that a loan is paid back.  Term is also the length of time that the rate remains fixed (We will call this the rate term).  The longer the rate term; the great the risk; the higher the rate.

Now, let's assume that all mortgages are FRMs and paid back over a 30 year term.  Why?  Most everyone understands the concept of a 30 year FRM: the rate is fixed for 30 years and paid back over 30 years.  So, what this means is the 6 month, 1 year, 3 year, 5 year, 7 year, and 10 years ARMs are now all FRMs and paid back over 30 years.  The rate is fixed for that period of time which is mentioned.

 Going back to our basics, the longer the term the higher the rate.  The 6 month FRM has a lower rate than the 10 year FRM.  So, why would one take one of these shorter terms versus a longer term?  The answer is simple: they have a general idea as to their future (they plan to move, add on, build a pool, refinance to take cash out, etc).  The reward for planning ahead: a lower interest rate.

Even if a person is uncertain of where they will be in the future, if they use statistics, they can get a lower rate.  Statistics show that the average homeowner refinances every 3-5 years and sells around 7 years.  Let's say someone wants to be conservative on the 7 year figure, they can go for a 10 year FRM.  They still will have a lower rate than that of the 30 year FRM.  But, there are those still that do not even want to consider the risk of what happens after that 10th year of the FRM.  For them, the 30 year FRM is best.

Now that I opened the can of worms on "what happens after the rate term expires," I will make a couple quick, simple answers.  Assuming one misjudged their future expectations of their mortgage, they have a couple options.

  1. Refinance and base the new mortgage on the new expectations
  2. Refinance and jump start the expectations
  3. Ride out the adjustments.

Ride out the adjustments? Yes, after the rate term has lapsed, the rate may/will adjust.  Every lender has different ways of capping what your rate can change, but they all have the same calculation on determining what the rate will be: Margin + Index.  Margin is a fixed amount.  It is the amount the bank charges to put it simply.  Index is an adjusting rate that is determined by market factors.  Enough said on this.

               

When does one let it ride?  Simple answer: rates have dropped.  Think back a couple years when rates were at record lows.  One could have been in a 3 year FRM that was about to adjust.  Instead of refinancing, one could have seen a drastic drop in their rate just by letting their rate ride.  Even with a fixed margin, rates dropped low enough for those individuals to enjoy a lower rate without the need to refinance.

So what is the best mortgage for you?  The best mortgage is the FRM that has the rate term equal to your future goals timeline and the amount of risk you are willing to take.  Now, there are variations to these FRM programs, so talk to your mortgage professional to determine which program best meets your needs.

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Rainmaker
299,082
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Wow!

I mean...WOW!

Nice work. 

July 27, 2007 03:58 PM #19
Rainmaker
98,205
Robert D. Ashby
Robert Ashby Photography - Miramar, FL
Jason...Excellent job.  This gets my vote for number one (I have not read all of them yet, but this was great).  I liked how you show that an ARM is truly a fixed rate of a determined time frame and how you touched on the fact the rate could go down as well.  Very nice job.
July 28, 2007 09:25 AM #20
Rainmaker
299,082
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

This gets my vote for number one

Ditto 

July 28, 2007 09:28 AM #21
Rainer
228,711
Sarah Cooper
Real Estate Shows - Hurricane, WV

(Jason, STAY.)

 

At least VISIT. 

July 29, 2007 12:39 PM #22
Rainer
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Sarah Cooper
Real Estate Shows - Hurricane, WV
Congratulations, Jason!!!!  :o)
July 30, 2007 11:19 AM #23
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Jason..... well done. Seriously, there isn't much more to say....  very easy to understand from a consumer's perspective. This was part of K.I.S.S., that I wrote about earlier.  Congrats on 3rd place...

jeff belonger

July 30, 2007 11:20 AM #24
Rainer
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Tony D. Howell
The best place EVER! - Wilmington, NC
Nice work!
July 30, 2007 11:23 AM #25
Rainer
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Kim Murphy
1st Advantage Mortgage / Draper and Kramer - Carol Stream, IL
Mortgage Loans in DuPage, Kane, Cook, Lake, Will C
Jason, Congrats on 3rd place!  Nice job!
July 30, 2007 11:24 AM #26
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Celeste "SALLY" Cheeseman
Century 21 Liberty Homes - Mililani, HI
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Congratulations!
July 30, 2007 11:28 AM #27
Rainer
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Thomas Weiss
Thomas R. Weiss - West Palm Beach, FL

Jason,

Good job, I hope this helps cahnge your mind, I'm winking... :0)

Tom Weiss

July 30, 2007 11:30 AM #28
Rainer
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Rey Gallegos
W.J. Bradley Mortgage Capital LLC (NV License # 504) - Las Vegas, NV
FHA, VA, Home Loans Las Vegas, NV
Jason, Great Job on your post and third place!  Well written! 
July 30, 2007 11:43 AM #29
Rainer
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Stefan Scholl
Buyer's Broker of Northern Michigan, LLC - Petoskey, MI
Northern Michigan Real Estate

I am getting really confused now after reading your post and Brian Brady's post on ARM's.  I guess it all depends on the terminology you are using.  It sounds like a 7/1 ARM would be a seven year fixed in your parlance. 

July 30, 2007 12:19 PM #30
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Very well done post and the title captures the reader, just like it is supposed to do. Excellent information. The 3 of you have done great and show the very best side of the mortgage industry. Others should be holding all 3 of you up as the BEST, and others should be emulating you and your counseling.
July 30, 2007 12:37 PM #31
Anonymous
Anonymous
Anonymous
I agree, great post.  Thanks - bookmarked.
July 30, 2007 12:41 PM #32
Rainmaker
299,082
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Congratulations on a personal and professional victory.  I appreciate the fact that "crossed the line in the sand" and delivered a knockout punch.

I'm looking forward to our continued collaboration as I read :

www.lakecountymortgage.net

Look for new subscriber tomorrow, Jason! 

July 30, 2007 01:25 PM #33
Rainer
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SHAUN WREN
LICENSE IS NOT PLACED - Lakeland, FL
Congratulations.
July 30, 2007 01:45 PM #34
Rainmaker
510,956
Chris Griffith
Downing-Frye Realty, Bonita Springs, FL - Bonita Springs, FL
Bonita Springs Fl Real Estate

and every time you try to get out, they pull you back in.  There is no escaping the clutches of Active Rain!

July 30, 2007 01:48 PM #35
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut - Middletown, CT
Your Connecticut Mortgage Expert
Congratulation Jason, this could have been easily number one.  I hope you reconsider the decision you made last week about your participation on ActiveRain.
July 30, 2007 01:55 PM #36
Rainmaker
265,979
Jay Beckingham
Premier Nationwide Lending - Port St Lucie, FL
"I love first time homebuyers"

good stuff.

when i started as a loan officer about 30 years ago the dominant mortgage product was a 30 year fixed rate mortgage. i would argue that dispite all the press about other products that the dominant mortgage product in the industry today is?

the 30 year fixed rate mortgage.

very interesting. 

July 30, 2007 01:56 PM #37
Anonymous
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Anonymous
Thank you very much for sharing, that was very good info.
August 20, 2007 12:17 AM #38
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Rainer
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Jason Price

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